Can Offshore Drilling Really Make the U.S. Oil Independent?

When Arizona Sen. John McCain accepted the Republican nomination for president, he vowed to cut America's reliance on foreign oil by opening up the nation's Atlantic and Pacific coasts to drilling—drawing cheers from GOP delegates on hand for his party's national convention. "We will drill new oil wells offshore, and we'll drill them now," McCain pledged to his faithful, who gushed with enthusiastic chants of "drill, baby, drill!" The ultimate goal, the candidate said: to "stop sending $700 billion a year (for oil) to countries that don't like us very much."

No one disputes that a lot of oil lies untapped under the rocky floors of the Atlantic and Pacific oceans off the U.S. coasts, in areas where Congress has banned drilling since 1982. But is it enough to free the U.S. from its dependence on foreign suppliers?

The Minerals Management Service (MMS), is the part of the U.S. Department of the Interior responsible for leasing tracts to oil and gas companies and collecting the royalties on them, which amount to around $8 billion a year. The leases are supposed to be awarded through a competitive bidding process, in which the best-qualified company coming in with the highest split of royalties wins. (The Interior Department's inspector general, however, released a scathing report on September 10 charging that 19 current and past officials in the MMS's Denver-based Royalty in Kind program were both literally and figuratively in bed with energy company execs. The IG report describes "a culture of ethical failure" in which staffers accepted vacations and other pricey gifts from oil companies, rigged contracts, did drugs with one another and had sex with industry reps.

The MMS has estimated that there are around 18 billion barrels in the underwater areas now off-limits to drilling. That's significantly less than in oil fields open for business in the Gulf of Mexico, coastal Alaska and off the coast of southern California, where there are 10.1 billion barrels of known oil reserves as well as an estimated 85.9 billion more.

The EIA estimates that by 2030, U.S. oil daily demand will climb to nearly 23 million barrels, with global per-day consumption expected to top 118 million.

But here's the catch: There is a chance that the MMS has miscalculated the amount of offshore oil, because its estimates are based on 30- to 40-year-old data. For example, MMS spokesperson Nicholas Pardi says a 1987 survey of the Gulf of Mexico indicated there was potentially nine billion barrels of oil there, but when the area was resurveyed nine years later (using newer technologies), the number jumped to potential 45 billion barrels.

In other words, says Ian Nathan, a senior research analyst with New York City–based Energy Intelligence Group (a publisher of data and information on the global energy industry), it is possible that areas currently off-limits to drilling might actually contain a lot more—or less, for that matter—petroleum than previously believed.

So why hasn't the info been updated? Gathering and analyzing this data is expensive: According to Lars Johan Frigstad, CEO of Oslo, Norway–based Scan Geophysical ASA, a seismic survey in the North Atlantic can cost $6 million or more a month and take one to four months or longer to gather (depending on the size of the area being surveyed).

And there's no incentive for oil companies—or the feds—to cough up the cash unless Congress lifts the ban, according to Harold Syms, chief of the MMS's Resource Evaluation Division. If the moratorium was lifted, the MMS would "evaluate the tracts...to be sure the public gets fair market value" for oil leases. He says the agency would issue a permit to an outside firm to do seismic surveys of designated areas, in return for giving all the resulting data to the MMS. The surveyors could also sell the information to private companies interested in bidding on the leases.

Oil companies would commission their own more precise seismic surveys after they were awarded leases, says Judy Penniman of the American Petroleum Institute, the industry's Washington, D.C.–based trade association, and test drill the most promising oil deposits. If test drilling revealed recoverable oil reserves, she says that a company would have to plunk down another $2 billion for an oil rig. But even if Congress were to lift its 16-year ban on offshore drilling tomorrow, she agrees with the EIA that it would take at least five years before an oil company awarded a lease could pump its first drop of oil.

What's more, industry experts say no matter how much oil there may be offshore, only some of it will be "recoverable," that is, able to be removed at a cost that's cheap enough to guarantee oil companies enough profit on their investment. Current shortages of both oil rigs and skilled manpower to operate them could also bottleneck such efforts.

According to Phyllis Martin, a senior EIA energy analyst, Atlantic and Pacific oil fields tend to be smaller on average than those in the Gulf of Mexico, but it is just as costly to drill them, making the economics of drilling these areas especially tough to justify.

In fact, oil companies have yet to take advantage of the nearly 86 billion barrels of offshore oil in areas already available for leasing and development. So why are they chomping at the drill bit to open up the moratorium waters and survey them anew?

"Oil company stocks are valued in large part based on how much proved reserves they have," says Robert Kaufman, an expert on world oil markets and director of Boston University's Center for Energy and Environmental Studies. Translation: just having more promising leases in hand would be worth billions of dollars.

So are promises of U.S. oil independence real—or rhetoric? The issue is not whether the U.S. can significantly reduce its reliance on oil imports with domestic, offshore oil, say both Kaufman and Nathan, but whether there is enough that is recoverable to significantly lower the price of a barrel of oil on the global market.

Even by 2030, offshore drilling would not have a significant impact on oil prices, according to Martin, because oil prices are determined on the global market. "The amount of total production anticipated—around 200,000 barrels a day—would be less than 1 percent of the total projected international consumption."

And disruptions to the global supply affect the price of every barrel of oil the U.S. purchases, whether it be from Saudi Arabia, Venezuela or off the New Jersey coast. "Suppose the U.S. got all its oil domestically, and the price was $100 a barrel. Then the Saudi family was deposed," disrupting that country's oil exports, Kaufman says. "The Saudis produce about 10 million barrels a day of the world's 85 million, so clearly prices would go up, because now there is this big shortfall of oil."

"Do you think oil companies are going to sell [U.S. oil] to U.S. consumers for anything less than top price?," he asks. "The answer is no."

What if Congress mandated that the offshore oil could not be exported? "The question of how much of that product that comes out, where it goes, I don't think Congress can dictate," industry rep Penniman says. "It goes onto the market. It's a free market system…but it is up to Congress [to pass] the laws on what they will and won't open."

Such a move could in fact increase the nation's energy costs. "Any time you impose a constraint, like 'oil from Alaska cannot go to Japan,'" Kaufman notes, "you're saying, 'don't do the cheapest thing, do something more expensive.' So everybody pays a little more. Where the free market does work very efficiently is to minimize transportation costs" for oil—which are determined by many factors, including the location of the nearest refinery that can handle the particular characteristics of the crude oil being shipped.

Kaufman dismisses as "nonsense" any promises that offshore drilling could make the U.S. "oil independent." Even if it could somehow insulate itself from the ups and downs of the global oil market, he notes, the U.S. would have to make a huge leap in domestic oil production to replace what it buys from overseas.

"At its peak in production, which occurred in 1970s, the U.S. produced about 10 million [barrels of oil] a day," Kaufman says. "Now, after 30 years of fairly steady decline, we produce about five million barrels a day," whereas we consume 20 million barrels daily. "Whoever talks about oil independence has to tell a story about how we close a 15-million-barrel gap."